The primary purpose of a Real Estate Investment Trust (REIT) is to invest in income-producing real estate assets or related assets. The goal of a REIT is to provide investors with the chance to engage in real estate while simultaneously reaping the benefits of investment trusts. Prior to the invention of the real estate investment trust, investors could only invest in real estate by purchasing houses or developing one from the ground up. With the introduction of REITs, investors can now invest in real estate units on the stock market.
REITs are open-ended or closed-end funds founded solely for the purpose of holding real estate, mortgage-related assets, or both, and are traded on the stock or real estate markets. It is a type of collective investment scheme in which investors pool their capital to provide financing for real estate investments, allowing individual investors to invest in, own, and manage portfolios of apartment complexes, hotels, retail centers, self-storage, warehouses, and other real-estate assets. The main aim of a REIT is to acquire an intermediate or long-term interest in real estate or property development and to raise cash from the capital market by issuing securities in the name of the trust’s pooled investors. Before investing in a REIT, keep in mind that they are managed by professional fund managers that are well-versed in the stock and real estate markets.
In a REIT, the investor purchases units in the trust, which enable them to receive income distributions on a regular basis and to share in any capital appreciation of the property in question. Investors have the right to keep control of their money by investing in a single property rather than a portfolio of properties.
Title to Real Estate Investment Property
REITs in Nigeria are governed by the Investment and Securities Act (ISA) of 2007 and the Securities and Exchange Commission Rules of 2013. The Securities and NigerianExchange Commission (SEC) is empowered by Section 154 of the Act to authorize, register, and regulate collective investment plans in Nigeria, including those operated as a real estate investment trust.
“A Real Estate Investment Trust can and shall entirely acquire and hold legal title to property or opt to hold equitable and beneficial title to such property via a TrustDeed or such other structure as may be acceptable to the SEC,” according to Rule 509(1) of the SECRules.
The Securities and Exchange Commission (SEC) allows real estate investment trusts to hold or acquire assets through the use of a declaration of trust, in which the legal interests in the real estate are held by the vendor and all beneficial interests are transferred to the real estate investment trust.
To protect the REIT, SEC Rule 509(2) states that when a real estate investment trust property is owned via a Trust Deed or another structure approved by the SEC, the following precautions must be maintained:
- Register a caution in the relevant land registry where the property is located, stating the scheme’s interest.
- Plaques and other notices expressing the scheme’s interest should be placed on the appropriate property.
- Deposit the original title documents, as well as any other applicable pre-signed documents, with the custodian of the scheme.
A REIT must qualify as an asset-backed security or a mortgage-backed security (in the case of a mortgage and hybrid real estate investment trust) under Rule508 of the SEC Rules.
Registration of REIT with the Securities and ExchangeCommission (SEC)
REITs must register with the SEC, and their applications must be submitted on the proper SEC Forms in accordance with the SEC Rules.
Requirements for the registration of REIT
- Two copies of the Certificate of Incorporation, Memorandum, and Articles of Association of Managers, each duly certified by the Corporation Affairs Commission (CAC).
- Two copies of the trust’s Certificate of Incorporation, Memorandum, and Articles of Association, all fully certified by the CAC.
- Two copies of each Certificate with the CAC’s certification of the directors, manager, and trustees of the trust.
- Sworn promise to file proof of separate trust account management at a reputable bank.
- Evidence that the manager’s and trustee’s minimum paid-up capital met the SEC’s standards as outlined in the SEC Rules and Regulations.
Requirements for the Registration of Units of REIT
- The issuer’s legal name and the address of its major office.
- The Chief Executive Officer and the Chief Accountant’s names and addresses, as well as the names and addresses of the Directors or persons exercising equivalent functions.
- The names and addresses of all persons owning 5% or more of any class of shares in the issuer, both on record and beneficially, as of the date the trust scheme application was filed.
- The number of proposed units of the issue that anyone has expressed an interest in buying or subscribing to.
- The nature of the business that the manager is currently transacting or will be transacting.
Requirements as to Form of Prospectus
The information required to be used or in the offering of sale of units of the proposed real estate investment shall follow the order set forth below in Rules 528 and 530, and thereafter it need not follow any particular order provided that the information is presented in such a way as to avoid obscuring any required information from being incomplete or misleading.
Content of the Prospectus as provided in Rules 530
- The name of the issuer/promoter, the fund manager, the fund manager’s RC number, the trustee, custodian, the type of units issued, the number of units being sold, the price, and the amount payable in full on application must all be listed on the front cover. The initial public offer must not be less than N1 billion Naira, and successive public offerings must not be less than N500 million Naira.
- The subject matter of the various sections or subsections of the prospectus, as well as the page number on which each section or subsection begins, are listed in the prospectus’ table of contents.
- Members of the investment committee’s names and profiles, including independent members;
- Where the fund manager is a new company, it must provide a statement of affairs after three to five years.
- Where relevant, there is a corporate directory of valuers, issuing house, registrar, issue solicitor, reporting accountants, trustee, ratingagency, and property manager.
- The fund’s aim, strategy for accomplishing the stated objective, and a statement that any major modifications to the investment objective must be approved by the unit holders.
Requirements as to Form, Number of Trust Deed
Every trust deed filed with the SEC for the purpose of registering a real estate investment trust must be printed and bound properly.
- Two copies of the trust deed, as well as a completed application for scheme authorisation.
- If the trustee fails to carry out its responsibilities under the trust deed or disclose a breach of the provisions to the SEC, it will be held accountable for breach of duty.
Finally, a real estate investment trust is a type of investment that allows investors to buy shares in a professionally managed real estate portfolio. Property investors will have exposure to the value of the trust’s real estate as well as the regular income generated by the properties.
The purpose of this article is to provide a general overview of the subject. You should seek professional guidance regarding your individual situation.
What is the minimum amount to invest in REITs?
REITs, like equity shares, are listed and traded on the stock exchange. As a result, if you want to invest in REITs in India, you’ll need a demat account.
- Previously, an investor had to spend a minimum of INR 50,000 in REIT units; however, this criterion has been removed, as per a notification issued by SEBI on July 30, 2021, for investing directly through stock exchanges. Initial public offerings (IPOs) and follow-on offers now have a lower minimum investment requirement of INR 10,000-15,000, down from INR 50,000 previously (FPOs).
- Another regulation change is the change in the lot size of REITs traded, which was previously set at 100 units. The minimum lot size has been reduced from 100 units to one unit as a result of the same SEBI regulation.
- There are three REITs that allow investors to invest in India at the moment. These are some of them:
How much does it cost to invest in REITs?
Private REITs, while they have many of the characteristics of a REIT, do not trade on a stock exchange and are not registered with the Securities and Exchange Commission in the United States (SEC). They aren’t required to give the same level of information to investors as a publicly traded firm because they aren’t registered. Institutional investors, such as major pension funds and accredited investors (those with a net worth of more than $1 million or an annual income of more than $200,000), are typically the only ones who buy private REITs.
According to NAREIT, the National Association of Real Estate Investment Trusts, private REITs may have an investment minimum ranging from $1,000 to $25,000 per unit.
Risk: Because private REITs are generally illiquid, getting your money when you need it can be challenging. Second, private REITs are exempt from corporate governance policies because they are not registered. That implies the management team can act in ways that demonstrate a conflict of interest with little to no oversight.
Last but not least, many private REITs are managed externally, which means they have a management that is paid to administer the REIT. External managers’ compensation is frequently based on the amount of money they manage, which presents a conflict of interest. The manager may be motivated to do things that increase his or her fees rather than what is best for you as an investment.
Non-traded REITs
Non-traded REITs are in the middle: they’re registered with the SEC like publicly listed firms, but they don’t trade on major exchanges like private REITs. This type of REIT is required to provide quarterly and year-end financial reports by law, and the filings are open to the public. Public non-listed REITs are another name for non-traded REITs.
Risk: Non-traded REITs can have high management costs, and they’re generally managed externally, similar to private REITs, posing a conflict of interest with your investment.
Furthermore, non-traded REITs, like private REITs, are typically relatively illiquid, making it difficult to get your money back if you suddenly need it. (Here are a few more points to keep in mind while investing in non-traded REITs.)
Publicly traded REIT stocks
This type of REIT is registered with the Securities and Exchange Commission (SEC) and trades on major stock markets, giving public investors the highest potential to profit from individual investments. Due to the nature of public corporations being subject to disclosure and investor supervision, publicly listed REITs are generally considered preferable to private and non-traded REITs in terms of management expenses and corporate governance.
Risk: REIT stock prices can fall, just like any other stock, especially if their specialized sub-sector falls out of favor, and sometimes for no apparent reason. There are also many of the hazards associated with investing in individual equities, such as poor management, poor business decisions, and large debt loads, the latter of which is particularly prevalent in REITs. (For more information on how to buy stocks, click here.)
Publicly traded REIT funds
A publicly listed REIT fund combines the benefits of publicly traded REITs with the added security of a mutual fund. REIT funds often provide exposure to the entire public REIT world, allowing you to buy one fund and own a stake in roughly 200 publicly traded REITs. Residential, commercial, lodging, towers, and other REIT sub-sectors are all represented in these funds.
Investors can benefit from the REIT model without the risk of individual stocks by purchasing a fund. As a result, they benefit from diversification’s ability to reduce risk while enhancing profits. Many investors like funds because they are safer, especially if they are new to investing.
Risk: While REIT funds largely mitigate the risk of a single firm, they do not eliminate dangers that are common to REITs as a whole. For REITs, rising interest rates, for example, raise the cost of borrowing. And if investors conclude that REITs are unsafe and would not pay such high prices for them, many of the sector’s equities could fall. In other words, unlike an S&P 500 index fund, a REIT fund is tightly diversified across industries.
REIT preferred stock
Preferred stock is a unique type of stock that works much like a bond rather than a stock. A preferred stock, like a bond, provides a regular cash dividend and has a fixed par value that can be redeemed. Preferred stock, like bonds, will fluctuate in response to interest rates, with higher rates resulting in a lower price and vice versa.
Preferred stock, on the other hand, does not receive a share of the company’s continuous profits, so it is unlikely to rise in value beyond the price at which it was issued. Unless the preferred stock was purchased at a discount to par value, an investor’s annual return is expected to be the dividend value. In contrast to a traditional REIT, where the stock can continue to appreciate over time, this is a big deal.
Risk: Preferred stock is less volatile than common stock, which means its value will not fluctuate as much as a common stock’s. However, if interest rates rise much, preferred stock, like bonds, will likely suffer.
Preferred stock is positioned above common stock (but below bonds) in the capital structure, requiring it to pay dividends before common stock, but only after the company’s bonds have been paid their interest. Preferred stock is often regarded as riskier than bonds, but less hazardous than common equities, due to its structure.
Can I buy 1 share of REIT?
REITs (Real Estate Investment Trusts) are a relatively new asset class for ordinary investors in India. It is not entirely understood, as with anything new, and hence can be daunting. Single REIT units can now be exchanged like stocks under the new rules. As a result, if you want to invest in this asset class, you must first comprehend it.
REITs are investment trusts that own, operate, and manage a portfolio of commercial properties that generate income. They’re a type of alternative investment that allows people to buy modest pieces of high-quality income-generating commercial real estate. It allows investors to earn annuities and income for the rest of their lives. So, if you buy a REIT asset, you can keep it for as long as you want and earn consistent income while doing so.
The National and Bombay Stock Exchanges (NSE & BSE) sell REIT units, which are listed on the Securities and Exchange Board of India (SEBI). A REIT unit can be purchased or sold in one of three ways: on the BSE or NSE, online, or through a licensed broker. You can also purchase REIT units when the company files for an IPO (IPO).
The REIT sponsors and managers invest in AAA-rated commercial office buildings with high-profile international tenants who are committed to long-term leases. The REIT’s income is derived from the monthly rents they pay, and 90 percent of that income must be paid to unitholders. The hotels, restaurants, and food courts within the commercial complexes also contribute to the bottom line.
If the asset quality is maintained, real estate is an appreciating asset. To that end, REIT managers guarantee that the property is well-managed in order to attract the best tenants and generate high rental returns. The income of the unit holders increases as the asset appreciates in value. Michael Holland, CEO of Embassy REIT, explains. “At least two independent valuers revalue the asset’s capital value every six months.” As a result, the market price of the units rises. Even if you buy REIT units, you will receive the unlocked value of capital appreciation every six months.
SEBI has announced that, unlike in the past, single REIT units can now be acquired and sold on the open market. Many investors were concerned that the pandemic-induced lockdown, as well as the resulting Work From Home (WFH) culture, would reduce the value of these assets. All three REITs are now highly weighted toward the IT sector.
Bengaluru, Mumbai, Pune, and Noida are among the cities where the Blackstone-Embassy REIT has properties. The Brookfield India REIT has holdings in Mumbai, Gurugram, Noida, and Kolkata, while the K Raheja-sponsored Mindspace REIT has assets in Mumbai, Hyderabad, Pune, and Chennai. Clearly, information technology is the engine and backbone of this investment asset.
Because most firms have steadily gone digital as a result of the pandemic, it has been a benefit to that sector. Unlike the United States and the United Kingdom, where the average age of IT employees is 40 years, just 7-8 percent in India are above the age of 40.
The majority of the IT employees are in their twenties and thirties. As a result, home environments are not conducive to working, and the additional amenities offered in tech parks have been a draw to get them back to work. As a result, asset managers have guaranteed that additional leisure and entertainment amenities within tech parks are well-managed. This results in increased income for the REIT and higher returns for unitholders.
According to Holland, another evidence of the IT sector’s health is the fact that IT hiring has doubled in the last five years. This will most likely result in new and increased leasing to accommodate the workforce. IT businesses typically favor secondary business areas, where property costs are more reasonable, than city centers, which are more expensive. This low rental cost for major space users, combined with the knowledge that the space is in high demand and may not be available for lease again in that development if it is given up, has led to IT companies keeping the space even during the lockdowns. Companies hold on to space when the annual rental value per square foot is less than or equal to the cost of outfitting it, according to SC Jaisimha, Executive Director, Cresa India. All of these variables result in consistent rental income for REITs.
As a result, as of June 30, 2021, all three REITs are among India’s top ten publicly traded real estate companies: Embassy REIT has Rs 329 billion, Mindspace REIT has Rs 174 billion, and Brookfield REIT has Rs 77 billion. The regular rental profits are secured because the laws stipulate that at least 80% of the portfolio must be completed and income-earning projects, with a maximum of 20% being under-construction assets.
Let’s see how REITs stack up against other property-based asset classes like shares and direct investing. Both REITs and equity shares are single-unit purchaseable instruments that are freely transferrable and professionally managed.
Direct real estate investments, on the other hand, typically need a minimum investment of Rs 25 lakh, are locked-in, illiquid, and come with transaction charges. Management standards are also unregulated and thus unassailable.
According to current legislation, REITs must have Grade A assets in prime locations and be largely office complexes with high-profile tenants from a variety of industries. This ensures a consistent rental revenue. Equity stocks are a mix of Grade A and B office, residential, and retail stocks with different tenants from various industries. In this asset class, rental revenue and occupancy rates can be more variable. Direct investment is typically made in single-tenant buildings with single-tenant risks. That investment will not yield a consistent income if the renter quits or if the sector underperforms.
REITs earn money through capital appreciation and regular cash distributions (which are required in 90% of cases), RE equity shares earn money through capital appreciation and dividends (which are not required in 90% of cases), and direct investments earn money only through a timely and profitable exit.
Direct investments are taxable, but REITs and RE equity dividends are tax-free.
The most significant advantage of REITs is that they are heavily regulated. It reduces the risk of a retail investment by requiring at least 80% of the value to be in completed and income-producing assets, assuring consistent cash flows. Speculative land acquisition is subject to constraints. At least 90% of the distributable cash flows must be distributed every two years.
The amount of debt that can be accumulated is limited. If the debt surpasses 25% of the asset value, unitholder consent is necessary. Debt must never exceed 49% of the value of the assets. All committees must have a representation of at least 50% of independent directors on the board. With the permission of 60 percent of unrelated unitholders, the REIT manager can be fired. Due to a distribution-linked management fee structure, the interests of unit holders are aligned.
Sponsors are prohibited from voting on their linked party transactions, among other safeguards. Acquisition or sale of assets worth more than 10% of the REIT’s value requires the approval of a majority of unitholders. The difference between the average valuation of two independent valuers and the acquisition value cannot be higher than 10%.
If a connected party leases more than 20% of the underlying asset, an independent valuer’s fairness judgement is necessary.
Investing in IT assets backed REITs is currently a solid idea for the short and medium term, as digital firms and solution providers are experiencing strong growth. As the regulator opens up new kinds of rental income earning assets to be grouped under this umbrella, many more REITs are expected to reach the market in the future.
(Data taken from a recent press conference in which Michael Holland, (CEO) Embassy REIT, and Srikanth Subramanian, Head Senior Executive Director, Investment Products, Kotak Mahindra Bank, discussed the ins and outs of REIT investing and why they are smart investments.)
Is a REIT an investment fund?
A real estate investment trust (REIT) is a corporation, trust, or organization that invests directly in income-producing real estate and is traded on the stock exchange. A real estate fund is a mutual fund that invests largely in securities issued by publicly traded real estate businesses.
What is the function of REIT?
The term “REIT” refers to a company formed solely for the purpose of channeling investible funds into the operation, ownership, or financing of income-producing real estate.
Can you lose money in a REIT?
- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Is REIT a good investment in 2021?
Three primary causes, in my opinion, are driving investor cash toward REITs.
The S&P 500 yields a pitiful 1.37 percent, which is near to its all-time low. Even corporate bonds have been bid up to the point that they now yield a poor return compared to the risk they pose.
REITs are the last resort for investors looking for a decent yield, and demographics support greater yield-seeking behavior. As people near retirement, they typically begin to desire dividend income, and the same silver tsunami that is expected to raise healthcare demand is also expected to increase dividend demand.
The REIT index’s 2.72 percent yield isn’t as high as it once was, but it’s still far better than the alternatives. A considerably greater dividend yield can be obtained by being choosy about the REITs one purchases, and higher yielding REITs have outperformed in 2021.
Do REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
Which REITs pay monthly dividends?
5 REITs That Pay Dividends Every Month
- Realty Income Corporation (O) is a commercial real estate investment trust that owns around 5,000 buildings with tenants such as CVS Health (CVS) and 7-Eleven.
